Alliance for Fair Board Recruitment v. SEC
U.S. Court of Appeals for the Fifth Circuit
Alliance for Fair Board Recruitment v. SEC
Opinion
Case: 21-60626 Document: 00516935890 Page: 1 Date Filed: 10/18/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
____________ FILED
October 18, 2023
No. 21-60626 Lyle W. Cayce
____________ Clerk
Alliance for Fair Board Recruitment; National Center
for Public Policy Research,
Petitioners,
versus
Securities and Exchange Commission,
Respondent.
______________________________
Petition for Review of an Order of
the United States Securities and Exchange Commission
Agency No. 34-92590
______________________________
Before Stewart, Dennis, and Higginson, Circuit Judges.
Stephen A. Higginson, Circuit Judge:
The “fundamental purpose” of the Securities Exchange Act of 1934
(Exchange Act), codified as amended at 15 U.S.C. § 78a et seq., is to enforce
“a philosophy of full disclosure . . . in the securities industry.” Affiliated Ute
Citizens of Utah v. United States, 406 U.S. 128, 151(1972) (quoting SEC v. Capital Gains Rsch. Bureau,375 U.S. 180, 186
(1963)); e.g., Lorenzo v. SEC,139 S. Ct. 1094, 1103
(2019); Kokesh v. SEC,581 U.S. 455
, 458 n.1 (2017); SEC v. Zandford,535 U.S. 813, 819
(2002); Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.,511 U.S. 164, 171
(1994); Basic Inc. v. Levinson,485 U.S. 224, 230
(1988); Santa Fe Indus., Inc. v. Green, 430 U.S.
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462, 477-78 (1977). Consistent with this goal, Nasdaq Stock Market, LLC
(Nasdaq) proposed a rule that would require companies listed on its stock
exchange to disclose information about their board members, as well as a rule
that would give certain companies access to a board recruiting service. After
the Securities and Exchange Commission (SEC or Commission) approved
these rules, Alliance for Fair Board Recruitment (AFBR) and the National
Center for Public Policy Research (NCPPR) petitioned for review. Because
the SEC’s Approval Order complies with the Exchange Act and the
Administrative Procedure Act (APA), the petitions are DENIED.
I.
A.
Nasdaq is a private company that operates a securities exchange.
Under the Exchange Act, a securities exchange must register with the SEC
as a “national securities exchange” or seek an exemption. 15 U.S.C. § 78e.
To be registered as a “national securities exchange,” the exchange must have
rules that “are designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, . . . to remove
impediments to and perfect the mechanism of a free and open market and a
national market system, and, in general, to protect investors and the public
interest.” Id. § 78f(b)(5). But the rules must not be “designed to permit
unfair discrimination between customers, issuers, brokers, or dealers, or to
regulate by virtue of any authority conferred by [the Exchange Act] matters
not related to the purposes of [the Exchange Act] or the administration of the
exchange.” Id. And the rules must not “impose any burden on competition
not necessary or appropriate in furtherance of the purposes of [the Exchange
Act].” Id. § 78f(b)(8).
The Exchange Act classifies “national securities exchange[s]” like
Nasdaq as “self-regulatory organization[s]” (SROs). 15 U.S.C. § 78c(26).
The rules of an SRO may be changed in two ways. The method at issue in
this case, set out in 15 U.S.C. § 78s(b), permits SROs to propose their own
2
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rules and obtain Commission approval. 1 Under 15 U.S.C. § 78s(b)(1), an
SRO must file its proposed rule with the SEC, and the SEC must publish
notice of the proposed rule and provide an opportunity for comment. After
notice and comment, the SEC must either approve or disapprove the rule.
The SEC “shall approve a proposed rule change of a self-regulatory
organization if it finds that such proposed rule change is consistent with the
requirements of this chapter and the rules and regulations issued under this
chapter that are applicable to such organization.” 15 U.S.C.
§ 78s(b)(2)(C)(i) (emphasis added). If the SEC does not make such a
finding, it must disapprove the proposed rule. 15 U.S.C. § 78s(b)(2)(C)(ii).
B.
On December 4, 2020, Nasdaq filed proposed rule changes to address
board diversity. See Notice of Filing of Proposed Rule Change to Adopt
Listing Rules Related to Board Diversity, Release No. 34-90574, 85 Fed. Reg.
80,472 (Dec. 11, 2020); Notice of Proposed Rule Change to Adopt Listing
Rule IM-5900-9 to Offer Certain Listed Companies Access to a
Complimentary Board Recruit Solution to Help Advance Diversity on
Company Boards, Release No. 34-90571 (Dec. 4, 2020). The SEC solicited
comments on the proposed rules and received many, including from
NCPPR. 2
On February 26, 2021, Nasdaq submitted a letter in response to
comments received and filed a superseding amendment with modifications
_____________________
1
The SEC may also “abrogate, add to, and delete from” the rules of an SRO by
following the process set out in 15 U.S.C. § 78s(c).
2
See U.S. Secs. & Exch. Comm’n, Comments on NASDAQ Rulemaking (last
modified Aug. 6, 2021), https://www.sec.gov/comments/sr-nasdaq-2020-
081/srnasdaq2020081.htm; Justin Danhof & Scott Shepard, Nat’l Ctr. for Pub. Pol’y Res.,
Re: File Number SR-NASDAQ-2020-081 (Dec. 30, 2020),
https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-8259890-
227947.pdf.
3
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and clarifications to the proposed rules based on those comments. 3 AFBR
filed a seventy-eight-page opposition to the proposed rules. 4
The proposed rules included two parts: (1) a “Board Diversity
Proposal” (Disclosure Rule) and (2) a “Board Recruiting Service Proposal”
(Recruiting Rule) (collectively, the Rules). Release No. 34-92590, 86 Fed.
Reg. 44,424-25 (Aug. 12, 2021) (Approval Order) (footnote omitted). As the
SEC explained:
Under the Board Diversity Proposal, the Exchange proposes to
require each Nasdaq-listed company, subject to certain
exceptions, to publicly disclose in an aggregated form, to the
extent permitted by applicable law, information on the
voluntary self-identified gender and racial characteristics and
LGBTQ+ status (all terms defined below) of the company’s
board of directors. The Exchange also proposes to require each
Nasdaq-listed company, subject to certain exceptions, to have,
or explain why it does not have, at least two members of its
board of directors who are Diverse, including at least one
director who self-identifies as female and at least one director
who self-identifies as an Underrepresented Minority or
LGBTQ+. Under the Board Recruiting Service Proposal, the
Exchange proposes to provide certain Nasdaq-listed
companies with one year of complimentary access for two users
to a board recruiting service, which would provide access to a
_____________________
3
See Jeffrey S. Davis, Senior Vice President, Senior Deputy Counsel, Nasdaq,
Response to Comments and Notice of Filing of Amendment No. 1 of Proposed Rule
Change to Adopt Listing Rules Related to Board Diversity (Feb. 26, 2021),
https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-8425992-
229601.pdf
4
See All. for Fair Bd. Recruitment, Comments Submitted on Behalf of Alliance for
Fair Board Recruitment (Apr. 6, 2021), https://www.sec.gov/comments/sr-nasdaq-2020-
081/srnasdaq2020081-8639478-230941.pdf.
4
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network of board-ready diverse candidates for companies to
identify and evaluate.
Id.
Under the proposed rules,
“Diverse” would be defined to mean an individual who self-
identifies in one or more of the following categories: (i) Female,
(ii) Underrepresented Minority, or (iii) LGBTQ+. . . .
“Female” would be defined to mean an individual who self-
identifies her gender as a woman, without regard to the
individual’s designated sex at birth; “Underrepresented
Minority” would be defined to mean an individual who self-
identifies as one or more of the following: Black or African
American, Hispanic or Latinx, Asian, Native American or
Alaska Native, Native Hawaiian or Pacific Islander, or Two or
More Races or Ethnicities; and “LGBTQ+” would be defined
to mean an individual who self-identifies as any of the
following: Lesbian, gay, bisexual, transgender, or as a member
of the queer community.
Id. at 44,425 n.18.
On August 6, 2021, the SEC issued an Approval Order, approving the
proposed rule changes. See id. at 44,424-25. The SEC found that the Board Diversity Proposal “would establish a disclosure-based framework for Nasdaq-listed companies that would contribute to investors’ investment and voting decisions.”Id. at 44,428
. The SEC recognized that “the proposal may have the effect of encouraging some Nasdaq-listed companies to increase diversity on their boards” but concluded that “the proposed rules do not mandate any particular board composition.”Id.
Companies that
failed to meet the objectives set forth in the proposed rule could nonetheless
comply with the rule by explaining why the company does not meet the
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objectives, “and the Exchange would not assess the substance of the
company’s explanation.” Id. Moreover, as explained in the Approval Order:
[W]hile there would be costs to listing elsewhere, companies
that object to providing any explanation can choose instead to
list on a different exchange. No company is required to list on
Nasdaq. Rather, exchanges compete for listings, with four
exchanges that currently list securities of operating companies
and nine exchanges that have rules for the listing of issuers on
the exchange. Listing exchanges compete with each other for
listings in many ways, including listing fees, listing standards,
and listing services. In approving proposed rule changes
relating to complimentary services that exchanges offer to
issuers, including issuers that switch listing markets, the
Commission has also explained that exchanges are responding
to competitive market pressures. . . . [T]he current proposals
may provide another way in which the exchanges compete for
listings.
Id.The SEC ultimately concluded the proposed rules were consistent with the Exchange Act and approved the Rules.Id. at 44,432-33
.
On August 10, 2021, AFBR petitioned this court for review of the
Approval Order. On September 8, 2021, this court granted Nasdaq leave to
intervene on behalf of the SEC. On October 27, 2021, NCPPR’s petition was
transferred from the Third Circuit to this court.
Petitioners contend that the Rules violate the First and Fourteenth
Amendments to the U.S. Constitution and violate the SEC’s statutory
obligations under the Exchange Act and the APA.
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II.
We turn first to petitioners’ constitutional claims. 5 We review
constitutional objections to agency actions de novo. See Emp. Sols. Staffing
Grp. II, L.L.C. v. Off. of Chief Admin. Hearing Officer, 833 F.3d 480, 484(5th Cir. 2016); Trinity Marine Prods., Inc. v. Chao,512 F.3d 198, 201
(5th Cir.
2007).
In general, the Constitution only applies to state action. This doctrine
“distinguishes the government from individuals and private entities,” and
“[b]y enforcing that constitutional boundary[,] . . . protects a robust sphere
of individual liberty.” Manhattan Cmty. Access Corp. v. Halleck, 139 S. Ct.
1921, 1928 (2019).
Petitioners have two state-action theories: first, that Nasdaq is itself a
government entity bound by the Constitution; and second, that Nasdaq’s
Rules in this case are attributable to the government such that constitutional
restraints apply. Neither prevails.
_____________________
5
As a threshold matter, the parties dispute whether NCPPR has standing. In its
opening brief, NCPPR addressed standing only by stating that “NCPPR is a non-profit
organization incorporated in Delaware and located in Washington, D.C. It both holds stock
and exercises its voting rights in Nasdaq-listed companies.” The SEC argues that this
statement fails to demonstrate standing because statements by counsel in briefs are not
evidence, Skyline Corp. v. NLRB, 613 F.2d 1328, 1337(5th Cir. 1980), and, even if such statements were evidence, “NCPPR does not state what Nasdaq-listed companies it owns stock in, whether those companies already meet Nasdaq’s diversity objectives, or how they plan to respond to the rules.” The SEC thus argues that NCPPR has forfeited the issue of its standing, and “only the arguments raised by AFBR are properly before the Court.” In its reply brief, NCPPR argues that it has not forfeited standing, and attaches a declaration by Scott Shepard, the director of NCPPR’s Free Enterprise Project, stating in part that NCPPR “held shares in about 30 Nasdaq-listed companies.” We opt to consider NCPPR’s declaration submitted in reply, because it appears that NCPPR’s cursory treatment of standing in its opening brief is explained by “a good-faith (though mistaken) belief that standing would be both undisputed and easy to resolve.” Ctr. for Biological Diversity v. EPA,937 F.3d 533
, 542 n.4 (5th Cir. 2019). And Shepard’s declaration suffices to establish
NCPPR’s standing to sue.
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A.
First, NCPPR contends that Nasdaq itself “is a state actor constrained
to act within constitutional bounds because it is a creature of federal law,
serves federal interests, and is controlled by a federal agency.” This theory
turns not on the SEC Approval Order, but rather on Nasdaq’s characteristics
and its relationship to the SEC. In accord with the many courts that have
considered this question, we hold that Nasdaq is not a state actor.
Nasdaq is a private entity. It is a private limited liability company
wholly owned by Nasdaq, Inc., a publicly traded corporation. Nasdaq’s
board of directors is selected by its broker-dealer members and by Nasdaq,
Inc., and companies wishing to list on Nasdaq do so by entering into contracts
with Nasdaq. While Nasdaq must register with and is heavily regulated by
the SEC, the Supreme Court has made clear that a private entity does not
become a state actor merely by virtue of being regulated. “[T]he ‘being
heavily regulated makes you a state actor’ theory of state action is entirely
circular and would significantly endanger individual liberty and private
enterprise.” Halleck, 139 S. Ct. at 1932.
Based on similar facts, our fellow circuits have found that SROs
registered with the SEC are private entities, not state actors. For instance,
the Second Circuit has determined, and subsequently affirmed in several
decisions, that SROs are not state actors. In Desiderio v. NASD, Inc., 191 F.3d
198, 206(2d Cir. 1999), a plaintiff claimed that her constitutional rights were violated by the mandatory arbitration clause in a form used by the National Association of Securities Dealers, Inc. (NASD), a “self-regulatory private corporation registered with the [SEC] as a national securities association.”Id. at 201
. The court held that the plaintiff’s “constitutional arguments all fail because the requisite state action is absent.”Id. at 206
. In reaching this
conclusion, the Second Circuit held that the NASD is a private entity:
The NASD is a private actor, not a state actor. It is a private
corporation that receives no federal or state funding. Its
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creation was not mandated by statute, nor does the government
appoint its members or serve on any NASD board or
committee. Moreover, the fact that a business entity is subject
to ‘extensive and detailed’ state regulation does not convert
that organization’s actions into that of the state. . . . Indeed, we
have already ruled that the New York Stock Exchange—a self-
regulatory private organization like the NASD—is not a state
actor.
Id.(citations omitted); see also D.L. Cromwell Invs., Inc. v. NASD Regulation, Inc.,279 F.3d 155, 162
(2d Cir. 2002) (“It has been found, repeatedly, that the NASD itself is not a government functionary.” (collecting cases)); Perpetual Sec., Inc. v. Tang,290 F.3d 132, 138
(2d Cir. 2002) (“It is clear that NASD is not a state actor and its requirement of mandatory arbitration is not state action.”). Other circuits have reached similar conclusions. See Epstein v. SEC,416 F. App’x 142, 148
(3d Cir. 2010) (unpublished) (“Epstein cannot bring a constitutional due process claim against the NASD, because the NASD is a private actor, not a state actor.” (cleaned up)); First Jersey Secs., Inc. v. Bergen,605 F.2d 690
, 698 (3d Cir. 1979) (noting that “Congress preferred self-regulation by a private body over direct involvement of a governmental agency”); Jones v. SEC,115 F.3d 1173, 1183
(4th Cir. 1997) (“While the NASD is a closely regulated corporation, it is not a governmental agency, but rather a private corporation organized under the laws of Delaware. As such, it is highly questionable whether its disciplinary action of members, even if it is considered to be a quasi-public corporation, can implicate the Double Jeopardy Clause.”); Bernstein v. Lind-Waldock & Co.,738 F.2d 179, 186
(7th Cir. 1984) (explaining that a securities or
commodity exchange is not “an arm of the federal government” because
“the purpose of the federal law is to strengthen the power and responsibility
of the exchange in performing a policing function that preexisted federal
regulation,” and ultimately holding that “the action of the Mercantile
Exchange was not the action of the federal government for purposes of the
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due process clause of the Fifth Amendment”); Rosee v. Bd. of Trade of City of
Chi., 311 F.2d 524, 526(7th Cir. 1963) (“The activities of the [Chicago] Board of Trade. . . do not fall within the category of governmental action.”); Galuska v. N.Y. Stock Exch.,210 F.3d 374
,2000 WL 347851
, at *2 (7th Cir. 2000) (stating in dicta that the “NYSE is not a governmental actor subject to the Constitution’s mandates”); Duffield v. Robertson Stephens & Co.,144 F.3d 1182, 1200-02
(9th Cir. 1998), overruled on other grounds by EEOC v. Luce, Forward, Hamilton & Scripps,345 F.3d 742
(9th Cir. 2003) (considering NASD and NYSE’s arbitration rules and concluding that there was no state action); Roberts v. AT&T Mobility LLC,877 F.3d 833, 843
(9th Cir. 2017)
(approvingly citing Duffield’s reasoning on state action). 6
Petitioners are incorrect that our court departed from this line of
authority in Intercontinental Industries, Inc. v. American Stock Exchange, 452
F.2d 935(5th Cir. 1971). In that case, petitioner Intercontinental Industries, Inc. (INI) asked the court “to review an order of the [SEC] granting the American Stock Exchange the right to strike the common stock of INI from listing and registration on the Exchange.”Id. at 937
. INI argued that the
procedure followed by the SEC and the Exchange was one that “denied [INI]
the full and fair hearing demanded by the due process of the Constitution.”
_____________________
6
Petitioners filed a 28(j)-letter directing this court to a three-sentence order from
a split D.C. Circuit panel, which granted an emergency injunction prohibiting the Financial
Industry Regulatory Authority (“FINRA”) from expelling one of its members pending
appeal. See Alpine Securities Corp. v. Financial Industry Regulatory Authority, No. 23-5129
(D.C. Cir. July 5, 2023). In addition to the different procedural posture of that case (an
injunction pending appeal) and the fact that it involves a different organization, the D.C.
Circuit appeal relates to an enforcement proceeding, which is not at issue here. To the
extent that Petitioner relies on the reasoning identified in one judge’s concurrence—that
FINRA may be a state actor—that view represents the opinion of one judge at a preliminary
stage of a case, prior to merits briefing, involves a wholly separate issue—an expedited
enforcement action adjudicated by FINRA—and contradicts decades of case law across
circuits. See discussion supra II.A.
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Id. at 940. Before reaching the merits of INI’s due-process claim, the court
said:
[T]he Exchange’s position that constitutional due process is
not required since the Exchange is not a governmental agency
is clearly contrary to numerous court decisions. See Burton v.
Wilmington Parking Authority, 365 U.S. 715 (1961); Colon v.
Tompkins Square Neighbors, Inc., 294 F. Supp. 134 (S.D.N.Y.
1968); McQueen v. Druker, 438 F.2d 781 (1st Cir. 1971). The
intimate involvement of the Exchange with the [SEC] brings it
within the purview of the Fifth Amendment controls over
governmental due process.
Id. at 941. The court also listed examples illustrating the SEC’s statutory
relationship with the American Stock Exchange. Id. at 941 n.9. But in the
fifty years since Intercontinental was written, the law upon which this passage
relied has changed. Intercontinental invokes Burton v. Wilmington Parking
Authority, where the Supreme Court attributed state action to a private entity
because the state had “so far insinuated itself into a position of
interdependence” with a private entity that “it must be recognized as a joint
participant in the challenged activity.” 7 365 U.S. 715, 725(1961). This no longer reflects the governing standard. As the Supreme Court explained in American Manufacturers Insurance Co. v. Sullivan, “Burton was one of our early cases dealing with ‘state action’ under the Fourteenth Amendment, and later cases have refined the vague ‘joint participation’ test embodied in that case.”526 U.S. 40, 57
(1999). Specifically, after the Supreme Court’s decisions in Jackson v. Metropolitan Edison Co.,419 U.S. 345
(1974), Rendell- Baker v. Kohn,457 U.S. 830
(1982), and Blum v. Yaretsky,457 U.S. 991
(1982), state action requires “affirmative” state “encouragement”—thus,
_____________________
7
The other two cases cited by Intercontinental, Colon v. Tompkins Square Neighbors,
Inc., 294 F. Supp. 134, 137-38(S.D.N.Y. 1968), and McQueen v. Druker,438 F.2d 781
, 782-
84 (1st Cir. 1971), also rely on Burton.
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joint participation exists where private acts “not only contribute[] to, but also
[a]re indispensable elements in, the financial success of a governmental
agency.” Frazier v. Bd. of Trs. of Nw. Miss. Reg’l Med. Ctr., 765 F.2d 1278,
1286-88(5th Cir.) (citations omitted), amended in part,777 F.2d 329
(5th Cir.
1985). And as we explain, supra Section II.B, under the modern doctrine, the
government did not act jointly with the SEC in this case.
Moreover, this passage in Intercontinental is dicta. 452 F.2d at 941. The court clarified that “rather than decide” whether the exchange was a state actor, the court took no position on the issue. Seeid.
Indeed, the court went on to reject INI’s due-process arguments on the merits. 8Id.
at 942–43. Because the state-action observation was not a necessary component of the court’s holding, the language on which petitioners rely is dicta. See In re Hearn,376 F.3d 447
, 453 (5th Cir. 2004) (noting that “obiter dictum” is a “judicial comment made during the course of delivering a judicial opinion, but one that is unnecessary to the decision in the case and therefore not precedential” (quoting Black’s Law Dictionary 1100 (7th ed. 1999)). Judge Friendly recognized as much a few years after Intercontinental was decided, characterizing the statement as dictum and casting doubt on the proposition in light of intervening Supreme Court precedent. See United States v. Solomon,509 F.2d 863, 871
(2d Cir. 1975) (“We need not here decide
whether stock exchanges may be subject to some due process requirements
for certain types of action as stated in dictum in Intercontinental
_____________________
8
In Rooms v. SEC, the Tenth Circuit made a similar move, pretermitting the state-
action question in the context of a due-process challenge to SEC action. There, the
petitioner argued to the Tenth Circuit that the SEC had violated his due-process rights by
upholding a permanent bar that the NASD National Adjudicatory Council imposed on him
as a sanction for misconduct. 444 F.3d 1208, 1212, 1213–14 (10th Cir. 2006). The court stated that “[d]ue process requires that an NASD rule give fair warning of prohibited conduct before a person may be disciplined for that conduct” and concluded that, “[b]ecause Mr. Rooms had fair notice that his conduct was contrary to [one of NASD’s rules], we reject his due process argument.”Id. at 1214
. But the court did not discuss state
action, much less explain if NASD’s rules constituted state action.
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Industries . . . , although the recent decision in Jackson v. Metropolitan Edison
Co., 419 U.S. 345 (1974), would suggest the need for some caution on this
score.”).
AFBR asserts that this court has cited Intercontinental “for its
constitutional holding” in two subsequent cases, and that these cases are
therefore “independent precedents” that bind us on the state-action
question presented here. But even assuming that Intercontinental is good law,
these cases do not turn Intercontinental’s dicta into precedent. AFBR first
cites Harding v. American Stock Exchange, Inc., 527 F.2d 1366(5th Cir. 1976). In Harding, the plaintiffs brought various claims against the American Stock Exchange for suspending the trading of its stock and for applying to delist its stock from the exchange.Id.
at 1366–67. In affirming the district court’s dismissal of the action, the court held that plaintiffs lacked a federal cause of action for their constitutional due-process challenge.Id. at 1370
. The court
then wrote, in a footnote: “We note that [the plaintiff] could have raised
alleged due process violations in an appeal from the SEC delisting order
under [15 U.S.C. § 78y]” and cited Intercontinental. Id. at 1370 n.5. This
passing remark about a hypothetical challenge not before the court has no
precedential effect. See In re Hearn, 376 F.3d at 453.
Second, AFBR cites North Alabama Express, Inc. v. United States, 585
F.2d 783(5th Cir. 1978). There, the court cited Intercontinental, among other cases, for the proposition that “[i]n the administrative context, due process requires that interested parties be given a reasonable opportunity to know the claims of adverse parties and an opportunity to meet them.”Id. at 786
. The court then explained that these requirements are embodied in certain sections of the Interstate Commerce Act.Id.
There is no mention of
Intercontinental’s state-action language, much less a statement or even
insinuation that stock exchanges are state actors by virtue of their
relationship to the SEC. This case too fails to give binding effect to the
passage in question from Intercontinental.
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The Supreme Court’s Amtrak cases do not help the petitioners either.
In Lebron v. National Railroad Passenger Corp., 513 U.S. 374(1995), and Department of Transportation v. Association of American Railroads,575 U.S. 43
(2015), the Supreme Court examined whether Amtrak qualifies as a state actor for constitutional purposes. Holding that it does, the Court in Lebron wrote that where “the Government creates a corporation by special law, for the furtherance of governmental objectives, and retains for itself permanent authority to appoint a majority of the directors of that corporation, the corporation is part of the Government for purposes of the First Amendment.”513 U.S. at 400
. The Court elaborated in American Railroads:
Given the combination of these unique features and its
significant ties to the Government, Amtrak is not an
autonomous private enterprise. Among other important
considerations, its priorities, operations, and decisions are
extensively supervised and substantially funded by the political
branches. A majority of its Board is appointed by the President
and confirmed by the Senate and is understood by the
Executive to be removable by the President at will. Amtrak was
created by the Government, is controlled by the Government,
and operates for the Government’s benefit. Thus, in its joint
issuance of the metrics and standards with the FRA, Amtrak
acted as a governmental entity for purposes of the
Constitution’s separation of powers provisions.
575 U.S. at 53–54.
Nasdaq is different. Although Nasdaq and other SROs must register
with the SEC, they were not created by the government. See Free Enter. Fund
v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 484-85 (2010) (explaining that,
although SROs are “subject to Commission oversight,” they are not
“Government-created, Government-appointed” entities). Nor does Nasdaq
operate under the direction or control of the SEC in the manner described in
Lebron and American Railroads. Its board members are not appointed or
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confirmed by government officials, nor are they removable by the
government. And although SROs must register with and have their rules
approved by the SEC, it is well established that “being regulated by the State
does not make one a state actor.” Halleck, 139 S. Ct. at 1932; see also Jackson,419 U.S. at 350
(explaining that even where “many particulars” of a private company’s business are “subject to extensive state regulation,” the company does not become a government entity). So Nasdaq bears no resemblance to Amtrak. See Perpetual Sec.,290 F.3d at 138
(“It is clear that NASD is not a state actor and its requirement of mandatory arbitration is not state action. . . . Lebron is clearly distinguishable; Amtrak, the corporation at issue in Lebron, was created by the government ‘by special law for the furtherance of government objectives,’ and the government ‘retain[ed] for itself permanent authority to appoint a majority of the directors of’ Amtrak. There is no commonality between NASD and Amtrak.” (alteration in original) (citation omitted)). Indeed, Nasdaq has fewer government ties than other entities the Supreme Court has held not to be state actors. See, e.g., San Francisco Arts & Athletics, Inc. v. U.S. Olympic Comm.,483 U.S. 522, 542-44
(1987) (holding that a federally chartered, regulated, and subsidized
corporation was not a state actor).
Finally, petitioners argue that Nasdaq must qualify as a state actor
because otherwise its authority to self-regulate would violate the private
nondelegation doctrine. According to petitioners, either Nasdaq is a state
actor subject to constitutional scrutiny, or it is a private actor
unconstitutionally exercising government power; the SEC and Nasdaq may
not—the argument goes— “have it both ways.” 9
_____________________
9
To be clear, because petitioners rely on this “either-or” proposition to establish
state action and do not ask us to strike down Nasdaq’s Rules, the SEC’s Approval Order,
or the Exchange Act on private nondelegation grounds, there is no private nondelegation
challenge properly before us in this case.
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But petitioners cite no authority for the proposition that a self-
regulating entity subject to government oversight must either exercise
delegated governmental authority or be a state actor. And it’s unsurprising
that the petitioners cannot find a case to back up this catch-22 because the
private-nondelegation and state-action inquiries are distinct. Under the
private nondelegation doctrine, “[a] federal agency may not ‘abdicate its
statutory duties’ by delegating them to a private entity.” Texas v. Rettig, 987
F.3d 518, 531(5th Cir. 2021) (quoting Sierra Club v. Lynn,502 F.2d 43, 59
(5th Cir. 1974)). The state-action doctrine, by contrast, asks whether the challenged conduct is fairly attributable to the government. See Am. Mfrs. Ins. Co. v. Sullivan,526 U.S. 40, 50
(1999). Petitioners fail to explain why Nasdaq cannot be a private entity whose conduct, while subject to government regulation, is neither an exercise of the SEC’s government authority nor fairly attributable to the SEC. 10 The Second and Third Circuits have each impliedly found as much by holding that SROs are not state actors and that SROs do not exercise unconstitutional delegations of legislative power. See R.H. Johnson & Co. v. SEC,198 F.2d 690
, 695 (2d Cir.), cert. denied,344 U.S. 855
(1952) (“In the light of the statutory provisions
concerning (a) the Commission’s power, according to reasonably fixed
statutory standards, to approve or disapprove of the association’s Rules, and
_____________________
10
Nor does the Sixth Circuit’s recent decision in Oklahoma v. United States, 62
F.4th 221(6th Cir. 2023) support petitioners’ private nondelegation argument. AFBR filed a Rule 28(j) letter alerting us to the Oklahoma decision, contending that it supports petitioners’ position that constitutional restraints apply to Nasdaq’s Rules and the SEC’s approval of the Rules. But Oklahoma is inapposite. There, the Sixth Circuit considered a private nondelegation challenge to the rulemaking authority of the Horseracing Authority, a private entity regulated by the Federal Trade Commission.Id. at 225
. In rejecting the nondelegation challenge, the court discussed the relationship between SROs and the SEC, noting that “[i]n case after case, the courts have upheld this arrangement, reasoning that the SEC’s ultimate control over the rules and their enforcement makes the SROs permissible aides and advisors.”Id. at 229
(citations omitted). The case weighs against
petitioners’ assertions regarding private nondelegation and says nothing at all about state
action.
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(b) the Commission’s review of any disciplinary action, we see no merit in
the contention that the Act unconstitutionally delegates power to
[NASD].”); First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 697 (3d Cir. 1979), cert. denied,444 U.S. 1074
(1980). Petitioners give us no reason to reach a
different result here.
Accordingly, we hold that Nasdaq is not a state actor subject to
constitutional constraints.
B.
Petitioners argue in the alternative that the SEC’s involvement with
and approval of Nasdaq’s Rules render the Rules subject to constitutional
scrutiny. This is only so if the Rules are “fairly attributable to the State.”
Sullivan, 526 U.S. at 50. For this standard to be satisfied, there must be “a sufficiently close nexus between the State and the challenged action of the regulated entity.”Id. at 52
(citation omitted). Such a close nexus exists “in a few limited circumstances—including, for example, (i) when the private entity performs a traditional, exclusive public function; (ii) when the government compels the private entity to take a particular action; or (iii) when the government acts jointly with the private entity.” Halleck,139 S. Ct. at 1928
(internal citations omitted).
None of these conditions is met here. First, exchange listing standards
are not “a traditional, exclusive public function.” Id.The New York Stock Exchange was founded in 1792, adopted a constitution in 1817, and promulgated rules for listed companies. See Am. Bar Ass’n, Special Study on Market Structure, Listing Standards and Corporate Governance, 57 Bus. Law. 1487, 1497 (2002);69 Fed. Reg. 71,256
, 71,257 (Dec. 8, 2004). Stock
exchanges then existed for over one hundred years as private associations
regulating their own members before the SEC was created in 1934. See 4
Thomas Lee Hazen, Law Sec. Reg. § 14:8 (2022). Rules like the
ones at issue in this case are therefore not “traditionally the exclusive
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prerogative of the State.” Frazier, 765 F.2d at 1285(emphasis omitted) (quoting Rendell-Baker v. Kohn,457 U.S. 830, 842
(1982)).
Next, this is not a case where “the government compel[led] the
private entity to take a particular action.” Halleck, 139 S. Ct. at 1928(citing Blum v. Yaretsky,457 U.S. 991, 1004-05
(1982)). Far from it—Nasdaq came
up with and proposed the Rules on its own.
Petitioners attempt to show that the SEC in fact compelled Nasdaq to
draft these Rules by pointing to the comments of two individual
commissioners, Allison Herren Lee and Caroline Crenshaw, who had
previously spoken in favor of diversity disclosure policies in the context of an
SEC rule. The notice of Nasdaq’s proposed Rules appears to reference those
comments in a list of reasons for the proposal. See 85 Fed. Reg. at 80,472 &
n.7. Nasdaq’s reasons included its view that increased diversity results in
“an increased variety of fresh perspectives, improved decision making and
oversight, and strengthened internal controls,” as well as its “observ[ation]
[of] recent calls from SEC commissioners and investors for companies to
provide more transparency regarding board diversity.” Id. at 80,472-73.
Because these comments were first mentioned in NCPPR’s reply
brief, petitioners forfeited this argument. See Guillot ex rel. T.A.G. v. Russell,
59 F.4th 743, 754 (5th Cir. 2023).
But even if we were to consider this argument, the commissioners’
remarks do not show that SEC compelled Nasdaq’s Rules. In making the
cited statements, the individual commissioners were not speaking on behalf
of the SEC as a body; rather, they were writing in a dissenting posture from
the promulgation of a final rule. See, e.g., Comm’r Allison Herren Lee, U.S.
Secs. & Exch. Comm’n, Statement, Regulation S-K and ESG Disclosures:
An Unsustainable Silence (Aug. 26, 2020),
https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-
26#_ftnref15. There is no evidence that the SEC as an entity weighed in on
the merits of diversity disclosure rules, much less that Nasdaq was
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“compelled” or even “significant[ly] encourage[d]” by the SEC to take this
particular action. See Halleck, 139 S. Ct. at 1928; Blum,457 U.S. at 1004
(explaining that state action occurs if the government “exercise[s] coercive power” or “provide[s] such significant encouragement, either overt or covert, that the choice must in law be deemed to be that of the State”). Thus, the commissioners’ comments do not transform Nasdaq’s Rules into state action. See Jackson,419 U.S. at 357
(“Approval by a state utility commission . . . , where the commission has not put its own weight on the side of the proposed practice by ordering it, does not transmute a practice initiated by the utility and approved by the commission into ‘state action.’”); cf. Skinner v. Ry. Lab. Execs.’ Ass’n,489 U.S. 602
, 615–16 (1989) (finding
sufficient “encouragement, endorsement, and participation” that implicated
the Fourth Amendment where the government “removed all legal barriers”
to testing on trains; “made plain not only its strong preference for testing,
but also its desire to share the fruits of such intrusions”; and “mandated that
the railroads not bargain away” their ability to test).
Nor is this a case where the government has acted jointly or is
otherwise pervasively entwined with the private entity such that the
challenged conduct is attributable to the government. See Halleck, 139 S. Ct.
at 1928(citing Lugar v. Edmonson Oil Co.,457 U.S. 922
, 941–42 (1982)). Petitioners cite Brentwood Academy v. Tennessee Secondary School Athletic Association, in which the Supreme Court explained that it has “treated a nominally private entity as a state actor when it is controlled by an agency of the State, when it has been delegated a public function by the State, when it is entwined with governmental policies, or when the government is entwined in its management or control.”531 U.S. 288, 296
(2001) (cleaned up). But these circumstances are absent here. Nasdaq generated the Rules itself, and then submitted them to the SEC for approval, as required by statute. The SEC engaged in its statutory review and issued the Approval Order. This yes-or-no approval process does not reflect the degree of entwinement required to turn the Rules into state action. See Sullivan,526 U.S. at 52
, 54
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(explaining that “[a]ction taken by private entities with the mere approval or
acquiescence of the State is not state action,” and that state “permission of
a private choice cannot support a finding of state action”); Flagg Bros., Inc. v.
Brooks, 436 U.S. 149, 165(1978) (holding that a state is not responsible for a private decision that state law “permits but does not compel”); Jackson,419 U.S. at 357
(holding that a determination that a utility was “authorized to employ” a business practice did not make the practice state action); Blum, 457 U.S. at 1004–05 (“Mere approval of or acquiescence in the initiatives of a private party is not sufficient to justify holding the State responsible for those initiatives.”); see also Desiderio, 191 F.3d at 206–07 (concluding that NASD’s challenged rule was not fairly attributable to the state because “no SEC rule or action that has been called to our attention encourages the NASD to compel arbitration,” and because “the arbitration clause in Form U-4 was drafted by the NASD in cooperation with other self-regulatory organizations, with no encouragement from the SEC,” and noting that though the rule “was subject to approval by the SEC, from which fact plaintiff infers that state action is present[,] [s]imply because the SEC approved the arbitration clause in Form U-4 is not enough. . . . The SEC’s ‘[m]ere approval’ of Form U-4 is ‘not sufficient’ to justify holding the state liable for effects of the arbitration clause.” (citations omitted)); Perpetual Sec.,290 F.3d at 139
(“Because NASD is a private actor and because there is no nexus between its challenged action (compulsory arbitration) and the state, Perpetual’s claim of a due process violation is patently without merit.”); Bernstein,738 F.2d at 186
(finding that the Fifth Amendment due process clause did not apply to the Mercantile Exchange because “the fact that it is heavily regulated by a federal commission will not do, as that would bring under the Fifth Amendment much of the private sector, ranging from hospitals to railroads”). And it does not matter, as NCPPR contends, that the SEC’s review is “active.” As the D.C. Circuit has explained, “[t]he Supreme Court has never held that the government becomes responsible for the actions of a third party due to the length or intensity of its attention to the actions of the party before approval.” Vill. of Bensenville v. FAA,457 F.3d 52, 65
(D.C. Cir. 2006).
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Finally, AFBR argues that because Nasdaq must enforce the Rules
against its listed companies, subject to SEC sanctions if it fails to do so, the
Rules are state action. AFBR relies on the Supreme Court’s decisions in
Shelley v. Kraemer, 334 U.S. 1(1948), and Moose Lodge No. 107 v. Irvis,407 U.S. 163
(1972), for this proposition. But this argument misses the mark. In Shelley, the Supreme Court found state action where state courts had enforced racially restrictive covenants.334 U.S. at 19
. Similarly, in Moose Lodge, the Supreme Court held that the Constitution prohibited “invok[ing] the sanctions of the State to enforce a concededly discriminatory private rule,”407 U.S. at 179
, and enjoined government enforcement of the discriminatory rule.Id.
The SEC has the statutory authority under 15 U.S.C.
§ 78s(g) and (h) to sanction an SRO for failure to enforce its own rules.
However, petitioners do not challenge these provisions or any enforcement
action brought under these provisions as to Nasdaq’s Rules. Instead,
petitioners seek constitutional review of the Rules themselves. Whether later
enforcement of the Rules against Nasdaq would be state action is not a
question presented by this petition, and so we will not touch it today.11
_____________________
11
NCPPR argues in a similar vein that Nasdaq’s Rules are not private compacts
but instead “operate[] . . . as federal law” because “companies must comply to participate
in the securities market,” and Nasdaq faces penalties if it does not enforce its Rules.
NCPPR cites Blount v. SEC, 61 F.3d 938(D.C. Cir. 1995) in support of this contention and reiterated its reliance on this case at oral argument. Setting aside that this authority was cited for the first time in NCPPR’s reply brief, the case is unpersuasive. In Blount, the D.C. Circuit entertained a constitutional challenge to a rule of the Municipal Securities Rulemaking Board (“MSRB”), finding that the rule amounted to state action.Id. at 941
. The court explained that the rule “operates not as a private compact among brokers and dealers but as federal law,” emphasizing that brokers and dealers are subject to financial, regulatory, and criminal penalties for failure to comply with MSRB rules.Id.
The court concluded that the rule was “a government-enforced condition to any participation in a municipal securities career.”Id.
(emphasis added). The same cannot be said about
Nasdaq’s listing rules. The Rules govern the private relationships between Nasdaq and its
listed companies. And should a company opt not to comply with the Rules, it can simply
list on a different exchange. The Rules therefore do not operate as a government-enforced
condition to participation in the market.
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* * *
The Supreme Court recently cautioned that “[e]xpanding the state-
action doctrine beyond its traditional boundaries would expand
governmental control while restricting individual liberty and private
enterprise.” Halleck, 139 S. Ct. at 1934. We heed this warning in holding
that the Rules drafted and proposed by Nasdaq, a private self-regulatory
organization, are not attributable to the government and are therefore not
subject to constitutional scrutiny.
III.
Petitioners also argue that the SEC’s Approval Order exceeds the
agency’s authority under the Exchange Act and is arbitrary and capricious.
We deny the petitions on these grounds.
A.
Under the APA, the SEC’s Approval Order may be set aside if it is
“in excess of statutory . . . authority.” 5 U.S.C. § 706(2)(C). To determine the extent of the SEC’s statutory authority, we “rely on the conventional standards of statutory interpretation,” Chamber of Com. v. U.S. Dep’t of Lab.,885 F.3d 360, 369
(5th Cir. 2018), and “must give effect to the unambiguously expressed intent of Congress.” 12 Huawei Techs. USA, Inc. v. FCC,2 F.4th 421, 433
(5th Cir. 2021) (internal quotation marks and citation omitted); accord Mex. Gulf Fishing Co. v. U.S. Dep’t of Com.,60 F.4th 956
,
963 (5th Cir. 2023).
Petitioners raise four challenges to the SEC’s statutory authority.
They argue (i) that the word “designed” in § 78f(b)(5) prohibits the SEC
from considering investors’ subjective beliefs that disclosure would be
valuable, (ii) that § 78f(b)(5) prohibits the SEC from approving an exchange
_____________________
12
Because the Exchange Act unambiguously authorizes the SEC’s Approval
Order, we do not consider whether, as NCPPR argues, deference to the SEC’s
interpretation of the statute would be inappropriate.
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rule that requires disclosure of information that would not be “material” for
purposes of a securities fraud claim, (iii) that Congress did not explicitly
authorize the SEC to approve a rule that infringes state sovereignty, and (iv)
that Congress did not explicitly authorize the SEC to approve a rule that
concerns “major policy questions of vast economic and political
significance.”
We reject these arguments and conclude that the SEC acted within its
statutory authority in approving Nasdaq’s Rules. 13
_____________________
13
NCPPR also contends that the Exchange Act violates the nondelegation doctrine.
This argument fails. Under the nondelegation doctrine, Congress can give executive
agencies “regulatory power” so long as Congress “provides an ‘intelligible principle’ by
which the recipient of the power can exercise it.” Jarkesy v. SEC, 34 F.4th 446, 461(5th Cir. 2022) (quoting Mistretta v. United States,488 U.S. 361, 372
(1989)); see Consumers’ Rsch. v. FCC,63 F.4th 441, 447
(5th Cir. 2023). Here, Congress gave the SEC numerous parameters for approving exchange rules. See 15 U.S.C. § 78f(b). To name a few, as described earlier, a rule must be “designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.” Id. § 78f(b)(5). A rule must not be “designed to permit unfair discrimination between customers, issuers, brokers, or dealers.” Id. A rule must not be “designed to . . . regulate by virtue of any authority conferred by this chapter matters not related to the purposes of this chapter or the administration of the exchange.” Id. And a rule must “not impose any burden on competition not necessary or appropriate in furtherance of the purposes of this chapter.” Id. § 78f(b)(8). This is more than enough guidance under this court’s and the Supreme Court’s nondelegation precedents. See, e.g., Gundy v. United States,139 S. Ct. 2116
, 2123– 24 (2019) (plurality op.); Jarkesy,34 F.4th at 462-63
(holding that the intelligible principle standard means “that a total absence of guidance is impermissible under the Constitution”); Consumers’ Rsch.,63 F.4th at 447
. And the petitioners have litigated this
case as though the SEC did have adequate guidance from Congress: the heart of the
petitioners’ APA challenge is that the SEC acted arbitrarily and capriciously in concluding
that Nasdaq’s Rules met the statute’s parameters.
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1.
To start, NCPPR argues that the SEC improperly considered “[t]he
subjective belief and desire of a subset of investors.” The Exchange Act
requires that the SEC find that an exchange rule is “designed” to meet
certain statutory objectives, see 15 U.S.C. § 78f(b)(5), and NCPPR contends
that the SEC may only rely on “objective evidence” in doing so. NCPPR
does not explain what counts as “objective evidence,” except to say
“empirical evidence” is in bounds and “subjective belief” is not.
But the Exchange Act does not limit the SEC to considering
“objective evidence” in deciding whether to approve a proposed rule.
Instead, “the findings of the [SEC] as to the facts, if supported by substantial
evidence, are conclusive.” 15 U.S.C. § 78y(a)(4) (emphasis added).
“Substantial evidence is such relevant evidence as a reasonable mind might
accept to support a conclusion. It is more than a mere scintilla and less than
a preponderance.” Meadows v. SEC, 119 F.3d 1219, 1224(5th Cir. 1997) (quoting Riley v. Chater,67 F.3d 552, 555
(5th Cir. 1995)). Under this
standard, so long as evidence is relevant to the issue at hand, the SEC can
rely on it.
Domestic Securities, Inc. v. SEC illustrates the point. 333 F.3d 239
(D.C. Cir. 2003). There, the petitioner challenged the SEC’s determination
that a platform for displaying securities orders was technologically sound.
See id. at 248. The petitioner argued that because the platform used an
“obscure communications protocol” instead of the “standard industry
protocol,” the platform would impose high costs on market participants. Id.
at 249 (cleaned up). Relying on the fact that “several” networks for
securities transactions “expressed an interest in fulfilling their quote display
obligations through [the platform],” the SEC found that the platform was
viable. Id. The D.C. Circuit thought that this was enough, holding that
“[t]hese expressions of interest support the SEC’s conclusion” that the
platform was viable, even though the platform did not use the “standard
industry protocol.” Id. As Judge Sentelle explained, writing for the panel,
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“[t]he making of policy decisions and the resolution of conflicting evidence”
is the SEC’s job, not the court’s. Id.
There is no textual basis in § 78f(b) for a separate “objective
evidence” standard. NCPPR points to the requirement that an exchange rule
be “designed to” meet certain goals,14 15 U.S.C. § 78f(b)(5), and argues that
a rule is “designed to” meet a goal if there is a “close causal nexus” between
the rule and the goal. Even if this were true, however, NCPPR gives no
reason why such a “close causal nexus” would have to be supported by
“objective evidence” as opposed to “substantial evidence,” which is all the
plain text of the statute requires. 15 See id. § 78y(a)(4).
Finally, NCPPR argues that the SEC cannot conduct an
“independent review” of an exchange rule if the SEC relies on investors’
“subjective belief” as evidence. We agree that “the SEC cannot simply
_____________________
14
Once again, see supra note 12, these goals are “to prevent fraudulent and
manipulative acts and practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.” 15 U.S.C. § 78f(b)(5).
15
The only case NCPPR cites in support of its theory, Business Roundtable v. SEC
(“Business Roundtable II”), is unpersuasive. 647 F.3d 1144(D.C. Cir. 2011). In Business Roundtable II, petitioners challenged an SEC rule that required “public companies to provide shareholders with information about, and their ability to vote for, shareholder- nominated candidates for the board of directors.”Id. at 1146
. The court held that the SEC acted arbitrarily and capriciously for having failed “adequately to assess the economic effects of a new rule,”id. at 1148
, in part because the SEC’s cost-benefit analysis was flawed. Seeid.
at 1149–51. Among other mistakes, the SEC “relied upon insufficient empirical data when it concluded that [the rule] will improve board performance and increase shareholder value by facilitating the election of dissident shareholder nominees.”Id. at 1150
. Specifically, the SEC relied “exclusively and heavily upon two relatively unpersuasive studies,” even though commenters submitted “numerous studies . . . that reached the opposite result.”Id.
at 1150–51. So, Business Roundtable II faulted the SEC for
misinterpreting the evidence and proceeding without enough evidence—not relying on the
wrong type of evidence.
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accept what a self-regulatory organization has done, but rather is obligated to
make an independent review.” Susquehanna Int’l Grp., LLP v. SEC, 866
F.3d 442, 446(D.C. Cir. 2017) (emphasis added) (cleaned up). But the SEC’s obligation to look beyond an exchange’s self-serving statements does not otherwise restrict what evidence the SEC can consider as “relevant.” Meadows,119 F.3d at 1224
(citation omitted). The SEC must independently
analyze investor comments submitted during the administrative process.
Still, the subjective opinions of those investors may be relevant evidence and
sufficient to meet the substantial evidence standard, as they are here.
2.
Petitioners’ materiality challenge is also unconvincing. Their
argument goes like this. Under the Exchange Act, the SEC cannot approve
an exchange rule that is designed to “regulate by virtue of any authority
conferred by [the Exchange Act] matters not related to the purposes of [the
Exchange Act] or the administration of the exchange.” 15 U.S.C. § 78f(b)(5).
According to the petitioners, “[a] disclosure requirement must be limited to
‘material’ information to fall within the scope of the Exchange Act,”
meaning that there is “a substantial likelihood that a reasonable investor
would consider the information important in making a decision to invest.”
Petitioners argue that “information regarding directors’ race, gender, and
sexuality is not material.” From these premises, petitioners conclude that
the SEC acted outside its statutory authority in approving Nasdaq’s Rules.
A “material misrepresentation (or omission)” is an element of
securities fraud claims under certain parts of the Exchange Act and the
SEC’s rules. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341(2005) (emphasis omitted) (discussing § 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5,17 C.F.R. § 240
.10b-5); see Heinze v. Tesco Corp.,971 F.3d 475, 483
(5th Cir. 2020) (explaining that § 14(a), 15 U.S.C. § 78n(a), and Rule 14a-9,17 C.F.R. § 240
.14a-9(a), allow a claim based on “material omissions from proxy
statements” under certain circumstances). And it’s true, as petitioners note,
that this element is satisfied “if there is a substantial likelihood that a
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reasonable investor would consider the information important in making a
decision to invest.” SEC v. World Tree Fin., L.L.C., 43 F.4th 448, 459(5th Cir. 2022) (internal quotation marks and citation omitted); see Levinson,485 U.S. at 240
(“[M]ateriality depends on the significance the reasonable investor would place on the withheld or misrepresented information.”); TSC Indus., Inc. v. Northway, Inc.,426 U.S. 438, 449
(1976) (similar).
But a disclosure rule can be “related to the purposes of [the Exchange
Act],” 15 U.S.C. § 78f(b)(5), even if the SEC does not find that the disclosure
rule is limited to information that would be “material” in the securities fraud
context. The “fundamental purpose” of the Exchange Act is “implementing
a philosophy of full disclosure,” Levinson, 485 U.S. at 230(internal quotation marks and citation omitted)—not just the disclosure of information sufficient to state a securities fraud claim. Indeed, the Exchange Act gives the SEC “very broad discretion to promulgate rules governing corporate disclosure.” Nat. Res. Def. Council, Inc. v. SEC,606 F.2d 1031, 1050
(D.C. Cir. 1979). To
give one example, for a security to be registered on an exchange, the SEC can
require the issuer to disclose any information about “the organization,
financial structure, and nature of the business” as is “necessary or
appropriate in the public interest or for the protection of investors.” 15
U.S.C. § 78l(b)(1)(A). Nothing in this provision or the provision governing
exchange rules cabins disclosure rules to information that would meet the
materiality element of a securities fraud claim. And, as the SEC Approval
Order explains, “[e]xchanges have historically adopted listing rules that
require disclosures in addition to those required by [SEC] rules.” 86 Fed.
Reg. at 44,438 & n.202 (giving examples).
A materiality standard for exchange disclosure rules is also
unworkable. Determining the materiality of a given statement is a “fact-
specific inquiry,” World Tree, 43 F.4th at 465(quoting Levinson,485 U.S. at 240
), that “is peculiarly within the competence of the trier of fact,”id.
(citation omitted). Because materiality is context dependent, it is unclear
how the SEC could say, in a factual vacuum, that a particular category of
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information is or is not material to investors in all circumstances. 16 To make
such a finding, the SEC would be forced to speculate about, and rule out, any
factual scenarios in which there might be “a substantial likelihood that a
reasonable investor would consider” any information falling within the
relevant category “important in making a decision to invest.” Id. at 459
(citation omitted). The prohibition in § 78f(b)(5) on exchange rules that are
designed to regulate matters unrelated to the purposes of the Exchange Act
does not contemplate such an impossible task. No court, to our knowledge,
has ever said it does.
Of course, the Exchange Act still limits the kinds of disclosure rules
the SEC can approve. An exchange rule, including a disclosure rule, must be
“designed to” accomplish certain statutory objectives. See 15 U.S.C.
§ 78f(b)(5). And disclosure rules that violate other requirements of § 78f
cannot be approved. To the extent that petitioners have briefed arguments
on these fronts, we address them below. Here, to resolve petitioners’
statutory argument, we only need to hold that § 78f(b)(5) does not require an
exchange disclosure rule to be limited to information that would be material
for purposes of a securities fraud claim.
Before moving on, we note that even if the petitioners’ theory were
right, substantial evidence supports the SEC’s finding that Nasdaq’s rule
would provide “information that would contribute to investors’ investment
and voting decisions.” 86 Fed. Reg. at 44,430. The SEC based this
conclusion on “the broad demand for this information” from “institutional
investors, investment managers, listed companies, and individual investors,
as well as statements made by institutional investors, asset managers, and
_____________________
16
In a specific factual setting, a specific statement may be “immaterial as a matter of
law” if “there is no substantial likelihood that a reasonable investor would consider [the]
statement[] . . . to have significantly altered the total mix of information.” Nathenson v.
Zonagen Inc., 267 F.3d 400, 422 (5th Cir. 2001) (internal quotation marks and citation
omitted).
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business organizations.” Id. In support, the SEC cited “statements from
Vanguard, State Street Global Advisors, and BlackRock that call for
companies to disclose board diversity information,” “petitions for [SEC]
rulemaking from groups of institutional investors,” and comments from
Goldman Sachs, Microsoft, and Facebook, among other market participants.
Id. at 44,430 nn. 91 & 92; see id. at 44,429 (pointing out that “many
commenters believe[d] that the proposed board diversity disclosures would
be material to investors”). For example, one “large, global asset manager”
asserted that “[t]he composition of a company’s board and management is
an important element of [its] fundamental analysis,” 17 and a letter on behalf
of investment institutions with over $325 billion under management said that
a similar regime in Canada had “improv[ed] both the quality and quantity of
diversity data” for use in “investment decision-making.” 18 This evidence is
sufficient to support the SEC’s determination that regardless of whether
investors think that board diversity is good or bad for companies, disclosure
of information about board diversity would inform how investors behave in
the market:
[F]or investors who support board diversity, the proposed
disclosures could inform their decision on issues related to
corporate governance, including director elections, and
company explanations as to why they do not meet the diversity
objectives could better inform those investors as to the risks
and costs of increased board diversity. And for investors who
_____________________
17
William J. Stromberg & David Oestreicher, T. Rowe Price Group, Inc., RE: SR-
2020-081 (Dec. 29, 2020), https://www.sec.gov/comments/sr-nasdaq-2020-
081/srnasdaq2020081-8204319-227487.pdf.
18
Kristi Mitchem, BMO Glob. Asset Mgmt., Re: The Nasdaq Stock Market LLC:
Notice of Filing of Proposed Rule Change to Adopt Listing Rules Related to Board
Diversity (Release No. 34-90574; File No. SR-NASDAQ-2020-081) (Jan. 11, 2021),
https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-8231371-
227747.pdf.
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do not believe that having additional “Diverse” directors
would be beneficial for a company, the proposed disclosures
could inform their decision to vote to preserve the existing
board composition in a company.
Id. at 44,431.
Petitioners argue that board diversity information is immaterial
because “there is no evidentiary basis to believe race, gender, and sexual
preference of directors bear any relationship to corporate governance or
performance.” But the SEC could find that disclosure of board diversity
information would be “viewed by [a] reasonable investor as having
significantly altered the ‘total mix’ of information made available,” Levinson,
485 U.S. at 231–32 (citation omitted), even without conclusive empirical
evidence that board diversity helps or hurts corporate performance. Here, as
we explained, the SEC decided that board diversity information
“contribute[s] to investors’ investment and voting decisions” based on
substantial evidence of industry demand for this information to use in
managing funds. 86 Fed. Reg. at 44,430. The SEC did not need to find that
there is an empirical or scientific basis about the effects of board diversity or
that these effects are beyond debate to conclude that a “reasonable investor”
could find board diversity information “important.” World Tree, 43 F.4th at
459. Rather, the SEC’s candid findings that “studies of the effects of board
diversity are generally inconclusive” and “that the effects of even mandated
changes remain the subject of reasonable debate,” 86 Fed. Reg. at 44,432, set
alongside substantial evidence that many investors already use board
diversity information to make investments, are consistent with a finding of
materiality—assuming that it is even possible to make such a finding outside
the context of securities fraud litigation. 19
_____________________
19
AFBR also argues that “[t]he SEC itself has said the key inquiries for materiality
focus on ‘quantitative considerations.’” But the Second Circuit case that AFBR quotes
explained that “[a]ccording to [SEC guidance about materiality], both quantitative and
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3.
Next, NCPPR argues that the SEC’s Approval Order approving
Nasdaq’s Rules regulates corporate governance, an issue reserved for the
states. Although NCPPR does not specify how the Rules regulate “the
internal affairs” of corporations, we think that NCPPR means that Nasdaq’s
Rules “impose . . . demographic quota and disclosure requirements on
corporate boards.” But the SEC conclusively determined, based on
substantial evidence, that Nasdaq’s proposal is a disclosure rule, not a
mandatory quota; that Nasdaq’s disclosure-based framework does not alter
the state-federal balance; and that the Exchange Act unambiguously
authorizes the SEC to approve disclosure rules.
a.
First, the SEC’s finding that Nasdaq’s proposal is a “disclosure-based
framework” and not a quota is supported by substantial evidence and
therefore conclusive. 20 86 Fed. Reg. at 44,428; 15 U.S.C. § 78y(a)(4). The
SEC observed that:
_____________________
qualitative factors should be considered in assessing a statement’s materiality.” ECA, Loc.
134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 197(2d Cir. 2009) (emphasis added). And the SEC guidance, which the Second Circuit treated as persuasive authority, demonstrates how incongruous it would be to import materiality into exchange- rule approval decisions: “[u]nder [the quantitative] factor, the SEC considers the financial magnitude of the misstatement.”Id.
How could the SEC assess “the financial magnitude” of a category of information without any facts about the disclosing company or the disclosure? In any event, in the securities fraud context, a plaintiff doesn’t have to show that a misrepresentation is quantitative—or quantify its magnitude—to establish materiality. For example, conflicts of interest are generally material, even though a conflict of interest is not quantitative or readily quantifiable. See World Tree,43 F.4th at 465
(affirming district court’s conclusion “that a reasonable investor would consider important
whether [d]efendants traded in the same securities as their clients,” and collecting cases).
20
Petitioners do not contest that the substantial evidence standard applies to this
determination, as Nasdaq urges, so they have forfeited any argument that our review is
under a different standard. See Guillot ex rel. T.A.G. v. Russell, 59 F.4th 743, 754 (5th Cir.
2023).
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the proposed rules do not mandate any particular board
composition[,] . . . . would not require a company to select a
director solely because that person falls within the proposed
definition of ‘Diverse,’ would not prevent companies and their
shareholders from selecting directors based on experience,
competence, and skills, and would not substitute a regulator’s
judgment for companies’ or their shareholders judgment in
selecting directors.
86 Fed. Reg. at 44,428. If a company does not meet diversity objectives, the
company has the option to “explain[] why it does not meet the objectives.”
Id. And Nasdaq “would not assess the substance of the company’s
explanation.” Id. Instead, companies that “prefer not to explain their
approach to board diversity” can take advantage of “substantial flexibility in
crafting the required explanation.” Id. According to Nasdaq, permissible
explanations include: “The Company does not meet the diversity objectives
. . . because it does not believe Nasdaq’s listing rule is appropriate,” “because
it does not believe achieving Nasdaq’s diversity objectives are feasible given
the company’s current circumstances,” “because the Nominations
Committee considers a variety of professional, industry, and personal
backgrounds and skill sets to provide the Board with the appropriate talent,
skills, and expertise to oversee the Company’s business,” and because the
Nominations Committee “is committed to ensuring that the Board’s
composition appropriately reflects the current and anticipated needs of the
Board and the company.” 21 Therefore, all a company has to do is give an
explanation, however short. In light of these parameters, the SEC was
entitled to credit industry comments “stat[ing] that the proposal would not
impose a quota for a minimum number of Diverse directors.” Id. at 44,427.
_____________________
21
See Davis, supra note 3, at 8.
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True, there are mandatory parts of Nasdaq’s proposal. Companies
need to report board diversity statistics, and a company with less than two
diverse board members must say more than, “the Company does not comply
with Nasdaq’s diversity rule.” Id. at 44,426 n.31. If a company with less than
two diverse board members refuses to disclose why—in even the most
minimal terms—the company may be delisted. See id. at 44,426. However,
as the SEC explained, “[t]his is distinct from facing a fine as an alternative to
compliance or possibly facing the requirement to dissolve for non-
compliance.” Id. at 44,432. In other words, the requirement that a company
give an explanation is not a sanction that mandates compliance with the two-
diverse-board-members benchmark. The only sanction is for giving no
explanation at all.
Thus, as the SEC concluded, the explanations are part of a disclosure
framework, not a quota. See, e.g., id. at 44,428 n.54. The SEC acknowledged
that this “proposal may have the effect of encouraging some Nasdaq-listed
companies to increase diversity on their boards.” Id. at 44,428 (emphasis
added). But the proposal does not require companies to have any number of
diverse board members. All that’s required, under the proposal, is a de
minimis explanation for having less than two diverse board members. 22
In sum, the SEC made a reasonable finding—based on sufficient
evidence about how Nasdaq’s proposal would work and industry reactions to
it—that the proposal does not impose a diversity quota on corporate boards.
We cannot “reweigh the evidence” and “substitute [our] judgment for that
of the [SEC].” Meadows, 119 F.3d at 1224. Accordingly, we will adhere to
the SEC’s conclusive determination that the proposal implements a
_____________________
22
See generally Grutter v. Bollinger, 539 U.S. 306, 335 (2003) (“Properly
understood, a ‘quota’ is a program in which a certain fixed number or proportion of
opportunities are reserved exclusively for certain minority groups.” (emphasis added)
(internal quotation marks and citation omitted)).
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“disclosure-based framework.” 86 Fed. Reg. at 44,428; see
15 U.S.C. § 78y(a)(4).
b.
SEC approval of Nasdaq’s disclosure-based framework does not
implicate the canon that Congress “must make its intention . . . unmistakably
clear in the language of the statute” “to alter the usual constitutional balance
between the States and the Federal Government.” Gregory v. Ashcroft, 501
U.S. 452, 460 (1991) (internal quotation marks and citation omitted).
At the threshold, this canon only applies when a statute is ambiguous.
Salinas v. United States, 522 U.S. 52, 60(1997) (citing Gregory,501 U.S. at 467
). But instead of identifying any triggering ambiguity in the Exchange Act,
NCPPR’s position appears to be that in approving Nasdaq’s proposal, the
SEC construed the Exchange Act to permit federal encroachment upon a
traditional state power. Without an adequately briefed articulation of what
specific statutory provision is at issue, and why that provision is ambiguous
such that the canon applies, we decline to hold that the SEC lacked statutory
authority to approve Nasdaq’s proposal on this basis.
Regardless, Nasdaq’s disclosure-based framework does not alter the
state-federal balance. It is well-established that disclosure rules do not
interfere with the role of “state corporate law” in “regulat[ing] the
distribution of powers among the various players in the process of corporate
governance.” Bus. Roundtable v. SEC (“Business Roundtable I”), 905 F.2d
406, 411-12(D.C. Cir. 1990). Although NCPPR suggests, contrary to this settled principle, that Nasdaq’s proposal “govern[s] the internal affairs of the corporation,” Santa Fe Indus., Inc. v. Green,430 U.S. 462, 479
(1977)
(citation omitted), NCPPR does not explain how a disclosure-based
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framework could have this effect or encroach on state corporate law in any
other way. 23
In any event, the Exchange Act unambiguously requires the SEC to
approve Nasdaq’s disclosure-based framework if it is “consistent with the
requirements of [the Exchange Act].” 24 15 U.S.C. § 78s(b)(2)(C)(i).
NCPPR does not point to any requirement of the Exchange Act that could be
plausibly read to prohibit an exchange from adopting a disclosure-based
framework for board diversity information. See supra Section III.A.2
(rejecting petitioners’ argument that the purposes of the Exchange Act limit
disclosure rules to material information). It would be surprising if NCPPR
could find such a provision because, as we have repeated, the fundamental
purpose of the Exchange Act is full disclosure in the securities industry. See,
e.g., Affiliated Ute Citizens of Utah, 406 U.S. at 151; Levinson,485 U.S. at 230
.
For those reasons, the federalism canon is not applicable here.
4.
Last, invoking the “major questions doctrine,” NCPPR argues that
the SEC cannot approve an exchange rule that “impose[s] unprecedented
demographic quotas and disclosure requirements regarding race, sex, and
sexual preference on companies valued at over 20 trillion dollars” (emphasis
in original), without “clear and explicit” Congressional authorization.
_____________________
23
For its part, AFBR asserts that the proposal “impos[es] obligations on
corporations.” This is true of every exchange listing rule that requires a listed company to
take any action and is not a sufficient basis to conclude that the proposal alters the state-
federal balance.
24
SROs have adopted listing rules on corporate governance matters with the SEC’s
approval. See Business Roundtable I, 905 F.2d at 409–10 (“[T]he exchanges have routinely
submitted changes in listing standards for approval . . . . Many of the past proposals dealt
with matters of internal corporate governance, but in no such case did the SEC seek to
exercise its veto.” (citations and footnotes omitted)). However, because the SEC’s finding
that the proposal is a disclosure rule is conclusive, we do not need to decide anything about
SRO rules that regulate corporate governance in this case.
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This is not a “major questions case.” West Virginia v. EPA, 142 S. Ct.
2587, 2610 (2022). The “major questions doctrine” applies in “extraordinary cases” where the “history and the breadth of the authority that the agency has asserted, and the economic and political significance of that assertion, provide a reason to hesitate before concluding that Congress meant to confer such authority.”Id. at 2608
(cleaned up). In those “extraordinary cases, both separation of powers principles and a practical understanding of legislative intent make us reluctant to read into ambiguous statutory text” a statutory delegation of authority to the agency.Id. at 2609
(internal quotation marks and citation omitted). Then, the agency “must point to a clear congressional authorization for the power it claims.”Id.
(internal quotation marks and citation omitted). Here, the SEC’s asserted
authority is an ordinary exercise of its power to approve exchange listing
rules; a disclosure rule for board diversity information is not significant
enough to trigger major questions concerns; and the Exchange Act authorizes
SEC approval of exchange disclosure rules.
The “history and the breadth” of the SEC’s asserted authority is
unremarkable. Id. at 2608(citation omitted). Since 1975, the Exchange Act has empowered and required the SEC to approve proposed changes to exchange rules. SeePub. L. No. 94-29, 89
Stat. 146 (1975) (codified as amended at 15 U.S.C. § 78s(b)). Because the core objective of the Exchange Act, as we have repeated, is to establish “a philosophy of full disclosure . . . in the securities industry,” Affiliated Ute Citizens of Utah,406 U.S. at 151
(citation omitted), exchanges sometimes adopt disclosure rules that go beyond the requirements of federal securities laws—for example, as the SEC’s Approval Order notes, Nasdaq “already requires its listed companies to publicly disclose compensation or other payments by third parties to a company’s directors or nominees.” 86 Fed. Reg. at 44,438. And more than a decade ago, the SEC itself adopted a disclosure rule related to board diversity. See17 C.F.R. § 229.407
(c)(2)(vi); Proxy Disclosure Enhancements,74 Fed. Reg. 68,334
, 68,364 (Dec. 23, 2009) (codified at 17
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C.F.R. § 229.407(c)(2)(vi)). This rule requires companies to disclose how the company’s nominating committee or board “considers diversity in identifying nominees for director.”Id.
If the committee or board “has a policy with regard to the consideration of diversity in identifying director nominees,” it must “describe how this policy is implemented, as well as how [it] assesses the effectiveness of its policy.”Id.
Disclosure rules, including those related to diversity, are business as usual for the SEC, and there is nothing “unheralded,” Util. Air Regul. Grp. v. EPA,573 U.S. 302
, 324 (2014), or “unprecedented,” Ala. Ass’n of Realtors v. Dep’t of Health & Hum. Servs.,141 S. Ct. 2485, 2489
(2021) (per curiam), about the SEC’s Approval
Order here.
Further, the SEC’s approval of a rule requiring disclosures of board
diversity information is not economically and politically significant enough to
trigger the major questions doctrine. Compare the SEC’s Approval Order to
agency action that the Supreme Court has found sufficiently significant. The
Court has held that the Food and Drug Administration lacked statutory
authority “to regulate, and even ban, tobacco products,” that the Centers for
Disease Control and Prevention lacked statutory authority to “institute a
nationwide eviction moratorium,” and that the Environmental Protection
Agency lacked statutory authority to regulate greenhouse gas emissions from
“millions of small sources, such as hotels and office buildings, that had never
before been subject to [permitting] requirements.” West Virginia, 142 S. Ct.
at 2608 (summarizing FDA v. Brown & Williamson Tobacco Corp., 529 U.S.
120, 126–27 (2000); Ala. Ass’n of Realtors,141 S. Ct. at 2488-90
; and Util.
Air. Regul. Grp., 573 U.S. at 324). In contrast with these assertions of agency
power over daily life across America, Nasdaq’s proposal requires companies
that voluntarily list on Nasdaq to disclose information about board member
diversity—a small step from disclosures about board diversity policies that
the SEC already requires. It is more than a stretch to say that these new
disclosures “affect[] every member of society in the profoundest of ways,”
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BST Holdings, L.L.C. v. OSHA, 17 F.4th 604, 611 (5th Cir. 2021), as NCPPR
implies. 25
Finally, even if this were an unheralded exercise of SEC authority with
sufficient economic and political significance, neither the SEC nor Nasdaq
asks us to “read into ambiguous statutory text” a delegation of authority to
the SEC to approve Nasdaq’s proposal. Id. That authorization is plain on
the face of the Exchange Act: the SEC “shall” approve Nasdaq’s disclosure-
based framework if it is “consistent with the requirements of [the Exchange
Act].” 15 U.S.C. § 78s(b)(2)(C)(i).
To find a major-questions hook in the text, NCPPR argues that the
Exchange Act “does not contain a single phrase explicitly or even implicitly
granting [the] SEC or SROs power to impose any demographic quota . . . on
corporate boards.” The premise of this argument is wrong because the
SEC’s finding that Nasdaq’s proposal is a disclosure-based framework is
conclusive. See supra Section III.A.3.a.
NCPPR also argues that the Exchange Act “does not contain a single
phrase explicitly or even implicitly granting [the] SEC or SROs power to
impose any . . . disclosure requirements on corporate boards.” This is wrong,
too. See, e.g., supra Section III.A.3.b. The text of the statute says that if a
disclosure rule is consistent with the requirements of the Exchange Act—
which is a disclosure statute, see, e.g., Affiliated Ute Citizens of Utah, 406 U.S.
at 151; Levinson, 485 U.S. at 230—the SEC must approve it. See 15 U.S.C.
§ 78s(b)(2)(C)(i). In turn, § 78f(b)(5) requires that a proposed rule be
_____________________
25
This is especially true because companies that reject Nasdaq’s disclosure-based
framework can list on a different exchange. And NCPPR’s conjecture that other exchanges
or the SEC could propose identical rules is irrelevant. We review agency action, including
SEC approval of proposed rules and SEC rulemaking, on a case-by-case basis, not
wholesale. Although we hold that the major questions doctrine does not prevent SEC
approval of Nasdaq’s proposal in this case, we decline NCPPR’s invitation to speculate
about how other yet-to-be proposed rules or future agency action subject to other statutory
standards, like SEC promulgation of rules for SROs, might fare.
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designed to meet one of several objectives. See 15 U.S.C. § 78f(b)(5). These
objectives are not, as NCPPR argues, “grants [of] authority for Nasdaq to
issue and for SEC to approve rules.” If the SEC “determines that” a
proposed rule is designed to meet one of those objectives, id. § 78f(b), and if
all other statutory requirements are met, the SEC must approve the rule, id.
§ 78s(b)(2)(C)(i). So the question is not, as NCPPR posits, whether
“[s]pecific authority to impose . . . disclosure requirements can[] be found
in” those objectives. Properly understood, the question is whether the
SEC’s determination that Nasdaq’s proposed rule is designed to meet one of
those objectives complies with the APA. We consider this question next. See
infra Section III.B.1.
In short, this is not a case where the SEC has asserted “highly
consequential power beyond what Congress could reasonably be understood
to have granted.” West Virginia, 142 S. Ct. at 2609. We hold that the SEC’s
Approval Order fell within its statutory authority under the Exchange Act.
B.
Finally, the SEC’s Approval Order is not arbitrary and capricious.
5 U.S.C. § 706(2)(A).
Under the “arbitrary and capricious” standard, the SEC “must
examine the relevant data and articulate a satisfactory explanation for its
action including a rational connection between the facts found and the choice
made.” Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S.
29, 43(1983) (internal quotation marks omitted). In reviewing agency action, we do not “substitute [our] judgment for that of the agency” but rather “consider[] whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.” Sierra Club v. U.S. Dep’t of Interior,990 F.3d 898, 904
(5th Cir. 2021) (cleaned up). “The petitioner has the burden of proving that the agency’s determination was arbitrary and capricious.” Medina Cnty. Env’t Action Ass’n v. Surface Transp. Bd.,602 F.3d 687, 699
(5th Cir. 2010) (citation omitted).
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Petitioners offer five reasons that the SEC acted arbitrarily and
capriciously. They argue that the SEC: (1) improperly decided that the
Disclosure Rule is designed to accomplish at least one objective listed in
§ 78f(b)(5); (2) improperly decided that the Disclosure Rule is not designed
to permit unfair discrimination among issuers; (3) improperly assessed the
costs of the Disclosure Rule; (4) failed to conduct an independent review of
the record; and (5) failed to adequately analyze the content of the Recruiting
Rule. None of these contentions has merit.
1.
Petitioners agree that an SRO rule need only be designed to meet one
of the enumerated statutory objectives. The SEC concluded that the
Disclosure Rule is “designed to . . . remove impediments to and perfect the
mechanism of a free and open market and a national market system,” among
other objectives, because the Disclosure Rule would “contribute to the
maintenance of fair and orderly markets.” 26 86 Fed. Reg. at 44,425. AFBR
argues that this determination is not supported by substantial evidence.
The statutory objective to “remove impediments to and perfect the
mechanism of a free and open market and a national market system,” 15
U.S.C. § 78f(b)(5), concerns the “maintenance of fair and orderly markets.”
15 U.S.C. § 78k-1(a)(1)(C); see NASDAQ OMX Grp., Inc. v. UBS Secs., LLC,
_____________________
26
Although the SEC found that the Recruiting Rule was consistent with
§ 78f(b)(5), see 86 Fed. Reg. at 44,425, 44,444, the SEC’s Approval Order does not identify
which of the statutory objectives the Recruiting Rule is designed to meet. Instead, the SEC
found the Recruiting Rule would help Nasdaq “compete to attract and retain listings” and
“reflects the current competitive environment for listings among national securities
exchanges.” Id. at 44,444. AFBR does not contend that the SEC failed to support these
findings as to the Recruiting Rule with substantial evidence. And AFBR does not appear
to argue that the Recruiting Rule is inconsistent with § 78f(b)(5), so any challenge to the
Recruiting Rule on this ground is forfeited. In any event, AFBR recognizes that promoting
fair competition in the exchange market is an adequate basis for the SEC to conclude that
a rule is designed to “remove impediments to and perfect the mechanism of a free and open
market and a national market system.”
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770 F.3d 1010, 1021 (2d Cir. 2014) (explaining that the Exchange Act “makes
plain that maintenance of fair and orderly markets is the animating goal of
federal securities law” and that the “remov[ing] impediments” is a means to
“this end” (internal quotation marks and citation omitted)). 27 As AFBR
acknowledges, fair and orderly markets assure economically efficient
securities transactions and fair competition among market participants. See
15 U.S.C. § 78k-1(a)(1)(C)(i)-(ii).
The SEC’s finding that the Disclosure Rule would “contribute to the
maintenance of fair and orderly markets” and is therefore “designed to . . .
remove impediments to and perfect the mechanism of a free and open market
and a national market system,” 86 Fed. Reg. at 44,425, is supported by
substantial evidence. The SEC found that “[b]oard-level diversity statistics
are currently not widely available on a consistent and comparable basis, even
though [Nasdaq] and many commenters argue that this type of information
is important to investors.” Id. In making this finding, the SEC relied on
numerous comments from market participants. See, e.g., id. at 44,429 nn.72
& 79. Indeed, the record is full of evidence that the status quo deprives
market participants of fair access to information about board composition,
impeding efficiency. For example, one commenter explained that current
disclosures “are insufficient and noncomparable” because some companies
report composition “using broad groupings” like “minority” while others
“report by specific racial or ethnic groups.” 28 In light of this “opacity,” the
commenter stated, current disclosures “provide little actionable or decision-
useful information for investors.” 29 Another asserted that “[m]any investors
_____________________
27
The “fair and orderly market” that Nasdaq operates is the exchange itself. See
NASDAQ OMX Grp., Inc. v. UBS Secs., LLC, 770 F.3d 1010, 1021 (2d Cir. 2014).
28
Aron Szapiro & Michael Jantzi, Morningstar, Inc., RE: Release No. 34-90574 (Jan.
13, 2021), https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-
8262444-227960.pdf.
29
Id.
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are left to consult board data that has been ‘assessed’ by third parties for
commercial purposes rather than collected directly from company reporting,
which raises concerns about accuracy, objectivity and consistency.” 30 A
third said that “a lack of standardization” in “the current reporting
environment” “creates a lack of consistency, comparability and
transparency” and that this environment “generates information
asymmetry, disorder and inefficiency.” 31 Because the Disclosure Rule
standardizes disclosures of board diversity information, including the format
and timing of disclosures, 32 the SEC reasonably found that the Disclosure
Rule “would make it more efficient and less costly for investors to collect,
use, and compare information on board diversity” and would “mitigate any
concerns regarding unequal access to information that may currently exist
between certain (likely larger and more resourceful) investors who could
obtain the information and other (likely smaller) investors who may not be
able to do so.” 86 Fed. Reg. at 44,430. Thus, based on substantial evidence,
the SEC concluded that the Disclosure Rule would “contribute to the
_____________________
30
Roger W. Ferguson, Jr. & Jose Minaya, Teachers Ins. & Annuity Ass’n of Am.,
Re: The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change to Adopt
Listing Rules Related to Board Diversity; File No. SR-NASDAQ-2020-081 (Dec. 31, 2020)
at 2, https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-8198333-
227346.pdf.
31
Michael W. Frerichs, Off. of the Ill. State Treasurer, Re: SR-NASDAQ-2020-
081 – Proposed Rule Change to Adopt Listing Rules Related to Board Diversity (Dec. 31, 2020),
https://www.sec.gov/comments/sr-nasdaq-2020-081/srnasdaq2020081-8198331-
227345.pdf.
32
As the SEC explained, under the Disclosure Rule, companies must “make board-
level diversity disclosures in a substantially similar format”; “following the first year of
disclosure, disclose the current year and immediately prior year” information; provide the
information “in a searchable format”; and “provide the required disclosures in a proxy
statement or information statement . . . in advance of the company’s annual shareholders
meeting or provide the required disclosures on the company’s website concurrently with
the filing of the company’s proxy statement or information statement.” 86 Fed. Reg. at
44,430 n.90.
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maintenance of fair and orderly markets,” id. at 44,425, and satisfied
§ 78f(b)(5). 33
2.
AFBR also argues that because the Disclosure Rule imposes different
disclosure requirements on domestic and foreign issuers, the SEC erred in
concluding that the rule is not designed to permit unfair discrimination
among issuers. See 86 Fed. Reg. at 44,426 n.26 (defining “foreign issuer”).
The Disclosure Rule operates differently for foreign issuers than other
Nasdaq-listed companies. Nasdaq-listed companies must generally list the
number of directors based on “gender identity (female, male, or non-
binary),” “race and ethnicity (African American or Black, Alaskan Native or
Native American, Asian, Hispanic or Latinx, Native Hawaiian or Pacific
Islander, White, or Two or More Races or Ethnicities), disaggregated by
gender identity,” and “self-identif[ication] as LGBTQ+,” as well as the
number of directors who did not disclose information in these categories. Id.
at 44,426-27. In contrast with these requirements, a foreign issuer must state
“whether disclosure is prohibited under its home country law,” “the number
_____________________
33
AFBR also argues that employment decisions for corporate boards have nothing
to do with a fair and orderly exchange. But the Disclosure Rule does not regulate
employment decisions for corporate boards; the SEC conclusively found that the rule is a
disclosure-based framework, not a quota. See supra Section III.A.3.a. The question then is
whether such a disclosure-based framework is designed to “remove impediments to and
perfect the mechanism of a free and open market and a national market system.” 15 U.S.C.
§ 78f(b)(5). For the reasons stated above, substantial evidence shows that it is.
Relatedly, petitioners argue that the SEC erred in determining that the Rules are
not designed to “regulate . . . matters not related to the purposes of [the Exchange Act],”
15 U.S.C. § 78f(b)(5), because “favoring certain people because of their race, sex, or sexual
orientation . . . is far removed from the purposes of the Exchange Act.” This argument,
too, rests on the mistaken premise that the Disclosure Rule imposes a quota on listed
companies. As the SEC conclusively determined, the Disclosure Rule does not regulate
the composition of corporate boards, thereby favoring certain people over others, but rather
requires companies to disclose information about board members’ identities.
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of directors based on gender identity (female, male, or non-binary),” “the
number of directors who self-identify as [u]nderrepresented [i]ndividuals in
its home country jurisdiction,” “the number of directors who self-identify as
LGBTQ+,” and the number of directors who did not disclose information in
these categories. Id. at 44,427.
The definitions of diversity for foreign issuers and non-foreign issuers
correspond with these disclosure requirements. For foreign issuers, a diverse
board member is defined as an individual “who self-identifies as one or more
of the following: Female, LGBTQ+, or an underrepresented individual based
on national, racial, ethnic, indigenous, cultural, religious, or linguistic
identity in the country of the company’s principal executive offices.” Id. at
44,426 n.26. For domestic issuers, a diverse board member is defined as “an
individual who self-identifies in one or more of the following categories: (i)
Female, (ii) Underrepresented Minority, or (iii) LGBTQ+.” Id. at 44,425
n.18. “Underrepresented Minority” means “an individual who self-
identifies as one or more of the following: Black or African American,
Hispanic or Latinx, Asian, Native American or Alaska Native, Native
Hawaiian or Pacific Islander, or Two or More Races or Ethnicities.” Id.
Both foreign issuers and non-foreign issuers without at least two
diverse board members must explain why. Foreign issuers must provide an
explanation if the board does not have at least two diverse directors, including
one who self-identifies as “Female.” Id. at 44,426 n.26. The second diverse
director “may include an individual who self-identifies as one or more of the
following: Female, LGBTQ+, or an [u]nderrepresented i]ndividual.” Id.
Most other issuers must provide an explanation if the board does not have at
least two diverse members, including one who self-identifies as “Female”
and one who self-identifies as “an Underrepresented Minority or
LGBTQ+.” Id. at 44,426.
In designing these standards, Nasdaq relied on evidence that women
are “underrepresented in boardrooms across the globe,” and that there “is
no internationally agreed definition as to which groups constitute
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minorities.” 34 So, to craft a definition of underrepresented individuals
applicable to foreign issuers, Nasdaq borrowed from the United Nations
Declaration on the Rights of Persons Belonging to National or Ethnic,
Religious and Linguistic Minorities and the United Nations Declaration on
the Rights of Indigenous Peoples. 35 See 86 Fed. Reg. at 44,434 n.144
(explaining the origin of this standard).
The SEC gave a satisfactory explanation for its conclusion that the
different requirements that apply to foreign issuers are not “unfairly
discriminatory.” Id. at 44,435; see State Farm, 463 U.S. at 43. The SEC
explained:
[I]t is not unreasonable for [Nasdaq], in crafting board diversity
disclosures, to recognize that the proposed definition of
“Underrepresented Minority” for domestic companies may
not be as effective in identifying underrepresented board
members in foreign countries that have differing ethnic and
racial compositions, and may therefore result in disclosures
that are less useful for investors who seek board diversity
information for Foreign Issuers. It is therefore not
unreasonable for [Nasdaq] to require Foreign Issuers to
provide disclosures relating to underrepresented individuals
based on national, racial, ethnic, indigenous, cultural, religious,
or linguistic identity in the country of the issuer’s principal
executive offices. Similarly, to the extent Foreign Issuers
choose to meet the proposed diversity objectives, it is not
unreasonable for [Nasdaq] to take into account the differing
demographic compositions of foreign countries and to provide
Foreign Issuers flexibility in recognition of the different
_____________________
34
Davis, supra note 3, Notice of Filing of Amendment No. 1, at 82, 140 (citation
omitted).
35
See Davis, supra note 3, Notice of Filing of Amendment No. 1, at 140-41.
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circumstances associated with Foreign Issuers hiring Diverse
directors. Moreover, investors would still have access to a
Foreign Issuer’s Board Diversity Matrix and any disclosures
explaining why it does not meet the applicable diversity
objective, and this information may still be important to
investors’ investment and voting decisions notwithstanding
the flexibility provided to Foreign Issuers.
86 Fed. Reg. at 44,435. To sum up, the SEC’s point is that because the
meaning of diversity varies globally, it is fair and desirable to let foreign
issuers report diversity information according to nationally appropriate
standards.
AFBR’s attacks on the SEC’s analysis are unavailing. AFBR asserts
that separate standards for foreign issuers undercut uniformity in disclosures
without explaining why these standards are “designed to permit unfair
discrimination.” 15 U.S.C. § 78f(b)(5) (emphasis added). Moreover, the
SEC rationally found that the disclosure-based framework would provide
investors with information that would influence investment and voting
decisions and would mitigate market inefficiencies, regardless of variations
in the standards for those disclosures. AFBR also speculates that foreign
issuers should have been treated more stringently because “the political and
economic marginalization of underrepresented minorities in many foreign
countries around the world is probably worse, not better, than in the United
States.” But AFBR ignores that the foreign issuers must still disclose the
number of board members who self-identify as underrepresented individuals
and may count underrepresented individuals for purposes of determining
whether an explanation is required.
3.
Next, AFBR objects that the SEC failed to adequately consider
“tremendous costs for firms that dare to defy the quotas” and failed to show
“that the asserted benefits of the diversity rule outweigh the costs.”
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AFBR misunderstands what the Exchange Act requires. The SEC
must consider whether proposed rules “impose any burden on competition
not necessary or appropriate in furtherance of the purposes of [the Exchange
Act].” 15 U.S.C. § 78f(b)(8) (emphasis added). So the SEC must analyze
burdens on competition, and then decide whether those burdens are
“necessary or appropriate” to further the purposes of the Exchange Act. Id.
These purposes include implementing a philosophy of full disclosure in the
securities industry, see, e.g., Affiliated Ute Citizens, 406 U.S. at 151, and relatedly, maintaining fair and orderly markets, see NASDAQ OMX Grp.,770 F.3d at 1021
.
Moreover, in fulfilling its duty under § 78f(b)(8), the SEC need not
“measure the immeasurable.” Lindeen v. SEC, 825 F.3d 646, 658(D.C. Cir. 2016) (citation omitted). We must “be mindful of the many problems inherent in considering costs and uphold a reasonable effort made by the [SEC].” Huawei Techs., 2 F.4th at452 (cleaned up). In deciding whether “any burden on competition” imposed by a rule is “necessary or appropriate” to further the purposes of the Exchange Act, 15 U.S.C. § 78f(b)(8), the SEC’s “discussion of unquantifiable benefits” is sufficient so long as the SEC articulates “a satisfactory explanation” for its analysis, “including a rational connection between the facts found and the choice made,” Lindeen,825 F.3d at 658
(cleaned up); see Huawei Techs.,2 F.4th at 454
(holding that the agency “was not required to support its analysis with
hard data where it reasonably relied on difficult-to-quantify, intangible
benefits”).
The SEC adequately considered potential burdens on competition.
The SEC noted AFBR’s concerns that the Disclosure Rule “would create a
target for activist divestment campaigns or shareholder lawsuits,” and “that
companies will need to spend limited resources to hire communications
consultants and attorneys to evaluate the marketing and legal risks of
providing an explanation,” along with concerns raised by other commenters
regarding pressure campaigns and harassment. 86 Fed. Reg. at 44,436 n.175.
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But on the other side of the ledger, the SEC found that Nasdaq’s proposed
rule changes “may promote competition for listings among exchanges by
allowing [Nasdaq] to update its disclosure rules and related listing services in
a way that better attracts and retains the listings of companies that prefer to
be listed on an exchange that provides investors with the information
required by the [Disclosure Rule].” Id. at 44,437. The SEC recognized that
some companies that are concerned about cost exposure might choose not to
list on Nasdaq or might leave Nasdaq. Id. at 44,437-38. Still, the SEC
observed that the Disclosure Rule allows for “[f]lexibility in formulating an
explanation for not meeting the diversity objectives,” flexibility for foreign
issuers, smaller companies, and companies with smaller boards, flexibility
about where the disclosures are filed, and phase-in periods for newly listed
companies. Id. at 44,437. Companies that do not have at least two diverse
board members can provide a minimal explanation or list on a different
exchange. Id. at 44,436. And given evidence of “interest shown in
comparable and consistent board diversity information,” the SEC explained
that the Disclosure Rule may spur some companies to list on Nasdaq,
benefiting investors “by increasing the number of publicly listed
companies.” Id. at 44,438.
In addition, the SEC reasonably weighed burdens on competition
against the “difficult-to-quantify, intangible benefits” of the Disclosure Rule
in furthering the purposes of the Exchange Act. Huawei Techs., 2 F.4th at
454. To recap, the SEC found that the Disclosure Rule “would provide
widely available, consistent, and comparable information that would
contribute to investors’ investment and voting decisions,” making “it more
efficient and less costly for investors to collect, use, and compare information
on board diversity.” 86 Fed. Reg. at 44,430. And the SEC found that the
Disclosure Rule would mitigate information asymmetries in the market. Id.
Based on this analysis, the SEC decided that the Disclosure Rule contributes
to the maintenance of fair and orderly markets. And given these benefits, the
SEC reasonably concluded that the Disclosure Rule “would not impose a
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burden on competition between issuers that is not necessary or appropriate
in furtherance of the purposes of the Act.” Id. at 44,435.
AFBR does not explain how the SEC acted arbitrarily and capriciously
in weighing burdens on competition against the purposes of the Exchange
Act. Instead, AFBR argues that the SEC ignored “tremendous costs for
firms that dare to defy the quotas.” The crux of AFBR’s argument is that
the SEC underestimated the costs of non-compliance to Nasdaq-listed
companies. 36 However, as we explained, in conducting the § 78f(b)(8)
analysis, the SEC did account for the costs that AFBR asserted in its
comment letter. See, e.g., 86 Fed. Reg. at 44,436-38 & 44,436 n.175
(summarizing portions of AFBR’s comment letter cited by AFBR in its brief
on appeal). And the SEC made a rational decision that those burdens on
competition were “necessary or appropriate” to further the purposes of the
Exchange Act. Therefore, AFBR has failed to meet its burden to show that
the SEC’s Approval Order is arbitrary and capricious on this basis. Medina
Cnty. Env’t Action Ass’n, 602 F.3d at 699.
_____________________
36
None of AFBR’s evidence quantifies costs from non-compliance or estimates the
magnitude of those costs in concrete terms. See, e.g., All. for Fair Bd. Recruitment, supra
note 4, Ex. B, Aff. of James R. Copland ¶¶ 20 (“In my expert opinion, firms that opt to
publicly explain their reasons for non-compliance with Nasdaq’s diversity rule will be
subject to an increased risk of reputational harm.”), 21 (“Negative news coverage and
diversity activist campaigns . . . could impair a firm’s reputation . . . and result in a higher
cost of capital, reduced profitability, and lower share prices, even if such effects might be
mitigated in the long run.”). The SEC “was not required to conduct or commission its
own empirical or statistical studies” to determine whether these costs would be
“tremendous,” as AFBR asserts on appeal. Huawei Techs., 2 F.4th at 454(cleaned up). AFBR also argues that the SEC “did not directly respond to [this] expert affidavit.” But the SEC cited to the relevant part of AFBR’s comment letter, 86 Fed. Reg. at 44,436 & n.175, and then considered whether the resulting burdens on competition were necessary and appropriate. AFBR cites no authority that this response was inadequate, nor does AFBR explain why this is so. In any event, the SEC “clearly thought about the commenters’ objections and offered reasoned replies—all the APA requires.” Huawei Techs.,2 F.4th at 450
(cleaned up).
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4.
In approving a proposed rule, “the SEC cannot simply accept what
[an SRO] has done but rather is obligated to make an independent review.”
Susquehanna, 866 F.3d at 446 (cleaned up). Petitioners argue that the SEC
failed in this regard. Specifically, they claim that the SEC did not
independently analyze “whether disclosures and quotas would be outside the
purposes of the Exchange Act,” “whether significant numbers of investors
in fact base their voting and investment decisions on the race, gender, and
sexual preferences of company directors,” and whether “preference for
directors with certain racial, gender, and sexuality characteristics originate[s]
from investors’ rational . . . desire for improved corporate governance.”
The SEC independently reviewed the record. Throughout the
Approval Order, the SEC documented Nasdaq’s position regarding the
proposal’s effects and compliance with the Exchange Act. See, e.g., 86 Fed.
Reg. at 44,427, 44,429, 44,431. And the SEC considered supporting and
contrary evidence in the record. See, e.g., id. at 44,431, 44,436. For example,
in finding that the Disclosure Rule is designed to accomplish the purposes of
the Exchange Act, the SEC reviewed, summarized, and synthesized
numerous comments regarding investor demand for board diversity
information. See, e.g., id. at 44,429-30 & nn.72-80. The SEC juxtaposed that
evidence against comments arguing that demand is overstated. See id. at
44,430 & n.82. Faced with this body of evidence, the agency thought for itself
and reached a reasonable conclusion. See Citadel Secs. LLC v. SEC, 45 F.4th
27, 34(D.C. Cir. 2022) (holding that the SEC did not make a Susquehanna error where the SEC took “data, analyzed it for itself,” and reached a reasonable conclusion). The agency did the same with respect to the question whether the proposal is a disclosure-based framework or a quota. Seeid. at 44
,427-28 & 44,427 nn.43-48.
The extent to which the SEC did not “simply accept what [Nasdaq]
has done,” Susquehanna, 866 F.3d at 446 (citation omitted), is apparent from
the SEC’s rejection of one of Nasdaq’s reasons for adopting the proposal.
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Nasdaq concluded that “an extensive body of empirical research
demonstrates that diverse boards are positively associated with improved
corporate governance and company performance.” 86 Fed. Reg. at 44,431.
But the SEC reviewed the studies cited by Nasdaq, as well as studies that the
comments referenced, and found that the results were “mixed.” Id. at
44,432. “Taken together, studies of the effects of board diversity are
generally inconclusive,” the SEC determined, “and suggest that the effects
of even mandated changes remain the subject of reasonable debate.” Id.
Further, the SEC found that studies of board diversity mandates were not “a
reliable basis for evaluating the likely overall effects of the [Disclosure Rule],
which does not mandate any particular board composition.” Id. This is not
the work of an agency taking an SRO’s “word for it.” Susquehanna, 866 F.3d
at 447 (faulting the SEC for taking a clearing agency’s “word for it” in
determining whether a dividend level was reasonable).
For those reasons, we cannot agree that the SEC abdicated its
statutory obligation to independently review the proposed rule.
5.
Finally, NCPPR poses a list of questions that the SEC purportedly
failed to consider in approving the Recruiting Rule. These questions include,
who will compile a list of board-ready diverse candidates and how will the list
be compiled, where will recommended candidates be posted, will the service
be available to companies at a fee, and if so, what will the fees be used for?
Many of these questions were answered in the SEC’s Approval Order.
The SEC noted that, according to Nasdaq, the proposed provider of the
board recruiting service is Equilar. 86 Fed. Reg. at 44,444. And Nasdaq’s
partnership with Equilar would not generate any revenue for Nasdaq. Id.
NCPPR argues that because these questions concern “operations, hiring,
duties, or mechanics” of the recruiting service, they concern “important
aspect[s] of the problem,” State Farm, 463 U.S. at 43. However, NCPPR
identifies no requirement of the Exchange Act to which these questions are
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“important” or even relevant. And it is not apparent why the SEC needed
to know how Equilar sources candidates, or any other granular information
about Equilar’s systems, to conclude that Nasdaq’s provision of an optional,
free network of diverse candidates to eligible listed companies would help
Nasdaq “compete to attract and retain listings.” 86 Fed. Reg. at 44,444.
NCPPR has not shown that any open question renders the Approval Order
arbitrary and capricious.
IV.
AFBR and NCPPR have given us no reason to conclude that the
SEC’s Approval Order violates the Exchange Act or the APA. The petitions
for review are DENIED.
52
Reference
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